Bankrupted by voodoo economics

IF YOU REMEMBER the 2000 election, you probably remember President Bush’s warning about why we needed to cut taxes: If we did not return the surplus to the taxpayers, Washington would spend it. Well, we all know what happened next. Bush returned the surplus to taxpayers -- and Washington spent the money anyway.

Conservatives have a number of analogies to explain why tax cuts will lead to spending restraint: Cut your child’s allowance. Starve the beast. But the analogies are all wrong. The child has a credit card. The beast has a private meat locker. Washington can spend whatever it wants, regardless of how much it taxes.

The right has been congenitally unable or unwilling to grasp this lesson. Last week, though, there was a faint glimmer of recognition. William Niskanen, chairman of the fervently anti-government Cato Institute, did a calculation showing that, since 1981, every $1 in tax cuts tends to produce 15 cents of extra spending. Likewise, every $1 of tax hikes tends to reduce spending by 15 cents. The notion that tax cuts cause spending to dry up, or that tax hikes encourage more spending, is not just wrong, it’s completely backward.

Now, Niskanen is not the first policy wonk to discover this correlation. Four years ago, Richard Kogan of the liberal Center on Budget and Policy Priorities discovered the same thing. I wrote about it in the New Republic -- and nobody paid any attention.

But Niskanen’s finding is getting some attention. Moderate libertarian Jonathan Rauch wrote about it in the Atlantic, and a Washington Post columnist picked it up from there.

You’d think conservatives would pay some attention to a study that empirically demolishes one of the central underpinnings of their domestic policy. Indeed, my fellow columnist, Jonah Goldberg, wrote on National Review’s blog last Monday that “conservatives are going to have to respond to Jonathan Rauch’s argument in the new Atlantic.�

Of course, no response ensued. Indeed, the next day, National Review was on its merry way, editorializing for more tax cuts, as if Niskanen’s study didn’t exist.

The curious thing is why conservatives persist in supporting a strategy that is demonstrably counterproductive to their stated goal of shrinking government. The answer can be found in the same entry by Goldberg. He proceeded to write: “There are others better qualified to deal with the economic issues. But if tax increases can be demonstrated to shrink government in some significant way, I’m certainly open to them.�

Indeed, there is plentiful evidence that tax hikes can slow spending. There is a sizable chunk of the Democratic Party that is willing to inflict pain on their constituents in the form of spending cuts as long as the rich bear some of the burden in the form of higher taxes. In 1982, 1983, 1990 and 1993, Democrats in large numbers voted for budgets that ratcheted back spending and raised taxes.

In 1995, many Democrats offered to cut spending and balance the budget. But Newt Gingrich and the Republicans quashed that move by insisting on huge tax cuts too.

The insistence on tax cuts tends to weaken fiscal restraint all around. Having tended to the rich with tax cuts, Bush had to buy off enough voters with spending hikes to win reelection.

Most conservatives are like Goldberg -- they want to shrink spending. But most conservatives, also like Goldberg, tend to think that “others are better qualified� to make those decisions. Conservative opinion outlets tend to subcontract out their economic thinking to a handful of polemicists, and virtually all of them are committed advocates of supply-side economics. They’re theologically committed to tax cuts and don’t really care about spending cuts. They studiously ignore any evidence that weakens their case -- which is to say, most of the evidence.

So, basically, you have a handful of supply-siders leading the rest of the conservatives around by the nose. The conservatives could cut a deal with the Democrats to tighten spending and taxes, but the anti-tax nuts are the ones who set policy for the movement.

It’s funny. Almost all the conservatives, including Goldberg, are furious at Bush for raising spending. But it hasn’t occurred to them to question the dogma of the voodoo economists who led them into this mess in the first place.